Surround Optical out in Lion 10.7 is broken

[jammnrose]

I use Lion and it works for me! See my post on S/PDIF (surround) not working when Firefox is open: viewtopic.php?f=12&t=95722 .
I did seem to have a few issues getting S/PDIF working initially, sometimes sound would cut out completely and I would have to reboot.

Try rebooting and opening only VLC with something you know has surround sound.